Robert Weinberg, a veteran of World War II and Korea, is also an
amateur naval historian, and has spent much of his free time in recent
decades studying the warships and operations of the world's great
navies. His day job, as principal of the Office of R.S. Weinberg of St.
Louis, MO, involves the in-depth statistical study of the beer industry.
The twain has met in Mr. Weinberg's newest statistical construct,
the Institutional Memory and Industrial Evolution Research Project, part
of the Brewing Industry Research Program II. Mr. Weinberg says that
between 1933 and 2004 there were seven "Beer Wars" and between
2005 and 2030, there will be at least three or four more. Our interview
follows:

Modern Brewery Age: When did you come up with the concept: of
"beer wars"?

Bob Weinberg: I used the term beer wars for the first time at a
meeting of the security analysts federation in St. Louis in March 1978.
This was contemporaneous with the first Star Wars movie, and I think
that was the inspiration. I was for looking a catch notion, and thought
I would call them beer wars. The thing that is interesting here, is that
this is an institutional history. Any business is shaped by a number of
institutional factors. These are factors over which the players have
little direct control. Economic and social institutions establish how
the game is played. You try to arrange things to have it played in your
favor, but by and large, old man river just keeps on rolling along.

Historically, what I call the seven original beer wars occurred in
sequence. You started with brewers trying to restart after Prohibition.
Many players were just trying to get rich quick. That was the First Beer
War, during the period 1933-1947. The Second Beer War, between
1947-1973, we saw the emergence of the national and super-regional
brewers and the decline of local brewers. There were a number of things
that determined this. A large portion of the U.S. beer drinking
population was in the armed forces in World War II. If you were in the
armed forces, odds are you were exposed to brands like Schlitz, Pabst
and Budweiser. People sampled these beers, and I think the public's
idea of beer changed forever.

I wonder if the beer that made it overseas would convert people,
having traveled across the Pacific on the decks of Liberty ships,
exposed to extreme heat ...

If you were overseas in combat conditions, almost any beer would
have tasted good. The can was also a big thing. It allowed you to ship
beer further. It became feasible to move beer great distances.

After the war, the relocation and increased mobility of large
blocks of the population favored the creation of the super regionals and
large national brewers. You may have been completely satisfied with your
local beer, but when you moved it was no longer available, so you had to
try a new beer. You must also consider demand and technological factors.
There were new economies of scale with the introduction of cans,
high-speed packaging lines and improved material handling systems. The
savings could be used to increase profits and marketing expenditures.

Then, in the 1950s, along came TV advertising, and that was
phenomenal. That created a barrier to entry, only surmountable by the
larger brewers. These factors created that second beer war, which lasted
a long time.

In the 1950s, the brewing industry was a club. Everyone knew each
other. Everyone played the same game. In die immediate post-WWII period,
many personal relationships were such that brewers disliked their
principal competitors more than they liked profits. All sorts of things
were done that made no rational sense at all. Several of the big brewing
families had borrowed money prior to Prohibition, and later lost their
breweries because their cash flow stopped and they couldn't pay
their debts. As a result, post-Prohibition brewers were loath to borrow
money.

Major expansions were financed out of retained earnings. If a
family-owned brewer paid a high dividend to finance his lifestyle, at
the expense of retained earnings, that company's future growth
would be constrained. They would be at a disadvantage with competitors
who were willing to accept lower dividends to plow money back in.

The period 1973-1977, which I call Beer War III, was triggered by
two words that changed the competitive equilibrium--Philip Morris. No
one in the brewing industry had ever spent so much money all at once.
Philip Morris spent over a billion dollars on bricks and mortar in the
short run. This forced serious competitors to build more capacity. All
of a sudden there was a huge spurt of capacity. This squeezed people
out.

The Fourth Beer War, 1977-1980, was a realization that the U.S.
beer market would be competition among the few, an oligopoly. The Fifth
Beer War, 1980-1991, marked the "new" competitive equilibrium.
The brewers underwent consolidation for survival, all of them scrambling
to attain critical mass. Critical mass is how much do you need to
maintain a competitive marketing program. Convert that into how many
barrels it will take, and there's your critical mass.

The period 1991-1995, this was interesting. You started to get very
creative market development, because brewers had to achieve competitive
advantage, and an acceptable level of company and industry growth. Then,
Beer War Seven, between 1995-2004, what I call the
"internationalization and super-internationalization" of the
market. The best example of this is what just happened, with a major
brewer gobbling up another major brewer. It's startling.

The interesting thing now is that those first seven beer wars were
evolutionary steps. You went through them. There is overlap, but by and
large, one happened, and then the other happened.

Now there are four areas that will happen concurrently. The first
is redistribution of consumer's beer dollar. This will be a sticky
wicket. Closely related is the rise of super retailers, and the assault
on the three-tier system. Wal-Mart accounts for 20-25% of all of Procter
and Gamble sales in the U.S. When you have a bilateral oligopoly you
have an interesting market structure that we know very little about. An
oligopoly is a couple of sellers. An oligopsony is a couple of buyers.
And when a couple of buyers face a couple of sellers, you have a
bilateral oligopoly. This will change things. Historically, the
political power of wholesalers locally is phenomenal. But now the giant
retailers will have a great deal of power. And, in theory, the giant
retailer is out to give the consumer beer at a lower price. That's
hard to argue with. At the moment, the three-tier system is secure, but
the future of this system may well be decided by the courts.

The other thing that is happening, is that we are seeing shorter
product lifecycles. We have a "new product blitz" strategy.
You have new products coming out, coming out, coming out. Throw enough
stuff on the wall and see what sticks.

The oligopoly now turns into a pseudo-duopoly. You have two major
players, and a lot of small guys around the edges of the market. This
leads to the rise of an interesting new kind of local brewer.

As change accelerates, there will be a need for new business
models, which reflect changes and scale economies, and changes in player
productivity. This will make things different. Who are the long run
survivors? Clearly A-B is a long-term survivor. Then you look at some of
the great smaller brewers. Sierra Nevada, and others.

When I speak of who will survive, I mean survive independently.
When breweries develop a large enough base, they become acquisition
targets. But while old breweries may die, old brands can live forever.

Overall, I have never seen a situation where things are so
confusing. All the possibilities have enormous implications. There are
new scale economies, and there are new factors that determine player
productivity. These things, which were always important, now become
strategically extremely important.

To make a mistake in a confusing, changing environment is an
example of "to err is human." Making an original mistake is
understandable. Remaking someone else's mistake is malpractice. In
this industry, there has been an extraordinary pride of product.
Ballantine is a marvelous example. That was my beer when I was a young
man in New York. I liked a heavier beer, and that's what they made.
But that company went belly-up. The owners felt the public did not
understand what beer was supposed to be. They felt that God was
punishing their non-customers by denying them that fine beer. This is
the only business I can think of where most brewers believed that the
good Lord gave their father or grandfather the recipe for a perfect
beer. If consumers didn't realize the perfection of the product,
they were unworthy of the product. And not drinking it, that is their
punishment [laughs].

There are two things that set beer apart from other consumer
products. One is that everyone who can afford to drink beer can afford
to drink even the most expensive beer on special occasions, if not
regularly.

The second thing is that beer drinkers are very influenced by their
friends. When a beer heads south, this is not because the beer drinker
suddenly thinks the beer is bad. It happens when his friends say
"you're still drinking that piss?" He is embarrassed and
changes his brand. You are interested in what your friends think of your
beer. This is an unusual dynamic for a consumer product.

The big brewers seem to be alarmed by the resurgence of spirits,
but I notice on your projections of spirits and beer, the actual and
expected lines coincide.

Look at the chart Beer Wars Chart 5, malt beverage share of total
servings. You have decline through post WW II. You went from over 60% to
something around 50%. In Beer Wars Chart Six, you see as the major trend
in malt beverages goes down, the major trend in distilled spirits goes
up. When spirits turn up, malt beverages turn down. There is generally a
correlation them.

If you look at Beer Wars Chart Seven, they level off. In the
parlance of economics, they are in a competitive equilibrium. You see
beer is drifting down modestly, and distilled spirits are moving up,
modestly.

Look at the chart showing actual vs. expected alcohol beverage
demand (Chart 10) based on a simple demographic model 1948 to 2002.
It's funny, the scale obscures it. You can see 1990, that bump due
to the excise tax. Total growth is small, so a slow-down in penetration
hits you harder.

Are there other reasons for the periodic decline of malt beverage,
and the ascent of distilled spirits?

Take a closer look at this phenomenon. There was a curtailment of
good distilled spirits during World War II. You have to age distilled
spirits, so this had an impact for a decade or more after the war.
Apologies to the brewers, but beer you turn on and off. The distilled
spirits industry gradually recovered, and distilled spirit share rose
until 1969. One could argue, and I may yet do that, that there are
natural cycles of these things.

So you think the current concern about the impact of distilled
spirits is overwrought?

The beer market is growing slowly, and there is ferocious
competition. So statistical movements that are a wiggle, that would have
been ignored five years ago, are suddenly significant.

Starting about 1972 or 1973, I started collecting advertising data.
What I've done is take McCann Ericson data, and constructed media
price indices. I can tell you how much was spent in current dollars. How
much is spent in constant dollars based on media. I look at this, and I
have to make an assumption I don't want to make. It costs X dollars
to launch a new brand. Look at measured media advertising, which is
horrible, lot of warts on that princess, but I think my numbers are
consistent, so I think this is instructive. So I think I know what it
costs to introduce a new brand. I'm looking at competition among
the light beers. I see A-B's spending on Bud Light has been less
sensational than Coors or Miller at some points in time. But then I add
in the Budweiser dollars. This is institutional spending for Budweiser
and Bud Light.

I don't know any ad exec worth diddly-squat, who doesn't
sincerely believe that if he had enough money he could reverse any
downward trend for a declining product. If he doesn't believe that,
he's in the wrong business. If you have people who have no
institutional memory of the beer business in the American market, they
hear that XYZ is a great agency, and XYZ makes a great presentation to
them, and they give XYZ X million dollars to market their beer. Everyone
is operating in good faith. Both parties are ignorant &precisely
what has happened in the past, but they are operating in good faith. So
you have a situation where you have industry specific dynamics, that
require knowledge of the industry, and you have institutional dynamics.
You have people telling each other stories and believing it.

In this environment, there is only one brewer that can afford to
make big mistakes. That is Anheuser-Busch. Historically, they are the
least likely to make those big mistakes. In the past, they have
calculated things well. They rarely have done things that are flat-out
wrong.

So you don't think we'll see another Schlitz, where a big
brewer totally blows it ...

I think that situation was unique. The money changers got into the
temple. The one thing you don't want to screw around with is the
beer. Oddly enough, the most modest expenditure in operating a large
national brewery is producing the beer. The two executives who put
Schlitz on the road to ruin had limited industry experience. They wanted
to increase profits by reducing the cost of manufacture, a fatal mistake
in the brewing industry. They lost control of the product, in a
competitive environment. And that was the end for them.

The beer business is an amazing industry, because there are just
enough things that are different, many of which are non-intuitive. And
that's why people who enter the industry from other fields can be
led astray.

I cannot think of any larger brand turned around without
significant repositioning. Period. No matter how much is spent. There
are two things that can happen. If you are a non-national brewer, you
can expand geographically until the rubber brand snaps. Or you can
reposition your product. For example, Anheuser-Busch repositioned an
unsuccessful premium light beer as a popular priced beer, and it has had
a reasonable life as a popular. That was Natural Light.

And repositioned again as a low carb beer ...

Low carb is one that I was wrong on. I never imagined it would be
successful. I may or may not be wrong in the long run. This is a good
case study of why forecasting is very difficult, especially about the
future [laughs].

So you do not see the next beer war as a conflict with spirits?

No. this is a continuing cycle. I think much of this is explained
by brewers and wholesalers. They are looking for a fall guy, so the
consumer is disloyal and distilled spirits are up. I don't think it
is a structural change, I think it is a normal cycle.

Perhaps accelerated by the malternatives with spirits branding?

Yes, that's part of it. I'm not all-knowing, but I have a
lot of data, and an enormous amount of history. I think my successes
have been reflected not mathematical pyrotechnics, but are based on my
ability to count things. You look at things, and you ask why it
happened, and then you start counting.

All of your analysis might not tell you what to do. It will tell
you what you shouldn't do. Let's say you have 10 instances,
and 9 of 10 it worked or didn't work. That's reason enough to
do it if situation looks the same, or not do it if the situation looks
the same. That's my defense of history.

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